In: Finance
Marco Chip, Inc. just issued zero-coupon bonds with a par value of $1,000. The bond has a maturity of 9 years and a yield to maturity of 7.01 percent, compounded semi-annually. What is the current price of the bond?
Please show the work as you'd enter it into excel/what formula is used/etc.
CALCULATION OF PRESENT VALUE OF THE BOND IF THE INTEREST PAID SEMI ANNUALLY | |||||||
Step 1 : Calculation of Annual Coupon Payments | |||||||
Par value of the bond issued is = | $1,000 | ||||||
Annual Coupon % | 0.00% | ||||||
Annual Coupon Amount | $0.00 | ||||||
Semi Annual Coupon Amount | $0.00 | ||||||
Step 2: Calculate number of years to Maturity | |||||||
Number of years to maturity = 9 years | |||||||
Interest is paid semi annyally so total period = 09*2 = 18 | |||||||
Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds | |||||||
Market rate of interest or Yield to Maturity or Required Return = 7.01% | |||||||
Bonds interest is paid semi annualy means so discounting factor = 7.01 % /2= 3.505% | |||||||
PVF = 1 / Discount rate = 1/ 1.03505 | |||||||
Result of above will again divide by 1.03505 , repeated this upto last period | |||||||
Period | PVF @ 3.505% | ||||||
1 | 0.9661 | ||||||
2 | 0.9334 | ||||||
3 | 0.9018 | ||||||
4 | 0.8713 | ||||||
5 | 0.8418 | ||||||
6 | 0.8133 | ||||||
7 | 0.7857 | ||||||
8 | 0.7591 | ||||||
9 | 0.7334 | ||||||
10 | 0.7086 | ||||||
11 | 0.6846 | ||||||
12 | 0.6614 | ||||||
13 | 0.6390 | ||||||
14 | 0.6174 | ||||||
15 | 0.5965 | ||||||
16 | 0.5763 | ||||||
17 | 0.5567 | ||||||
18 | 0.5379 | ||||||
So Present value of the $ 1 at the end of Period 18th = 0.5379 | |||||||
Present value of the Bonds = $ 1000 X 0.5379 | |||||||
Present value of the Bonds = | $537.89 | ||||||
Answer = Present Value of the Bonds = $ 537.89 | |||||||